Romney backer lost $4 million plus on Intrade in possible manipulation attempt: researchers

Researchers from Microsoft and Columbia University have found that a single trader on Intrade accounted for a third of bets Mitt Romney would win in the two weeks leading up to last year\’s presidential election, losing millions of dollars in a possible attempt to make the Republican\’s chances look better.

They found that a single trader \”accounted for one-third of all bets placed on Romney during our observational window, and lost almost four million dollars in the process.\”

The researchers say \”this trader could have been attempting to manipulate beliefs about the odds of victory in an attempt to boost fundraising, campaign morale, and turnout.\”

They acknowledge as well that \”traders could be engaging in cross-market arbitrage, hedging exposures in more conventional asset markets.\”

Intrade was a popular source for media outlets, including MarketWatch.com, to gauge sentiment towards the two presidential candidates in the 2012 race outside of the traditional voter polls. For instance, on October 24, 2012, MarketWatch\’s Capitol Report blog noted that \”President Obama has fallen off the Intrade cliff\” and cited predictions from the online betting site.

Intrade suspended trading in March as it investigated \”financial irregularities.\” The site has continued to post updates about that investigation and the status of customers\’ accounts. On Wednesday, Intrade director Ronald Bernstein commented on the academic study, posting a blog on Intrade.com that \”we are in the process of supplying additional data for further analysis.\” He wrote:

Many of the articles about the study (as well as the study itself) focus on the following two themes: a) the persistence of a profitable arbitrage between Intrade prices and other real money betting sites for the key contract, and b) the motivation of the “large trader”.

There are a number of factors that may have contributed to the persistent arbitrage. Primarily, there is a difference between Intrade’s fee structure (a single monthly fee) compared to the typical commission charge on trading profits charged by others. Secondly, there are “regulatory” hurdles that create arbitrage opportunity; i.e. It was (and still is) difficult for US citizens to trade on markets related to political outcomes. Political markets were not offered by “traditional” US exchanges, and attempts to introduce this product set by a regulated US exchange have been rebuffed by regulatory authorities.

The academic report drew other conclusions, perhaps not surprising to anyone familiar with what\’s known as a \’fanboy\’ mentality around certain stocks. Partisanship was strong on Intrade, with 86% of traders never changing the direction of their exposure even once, found the Sethi/Rothschild study.

While partisanship among traders in a market dedicated to political events is to be expected, the researchers speculate that \”it would not be surprising if one were to find Apple or Samsung partisans among investors.\”

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